Digimarc Corp Q3 FY2021 Earnings Call

Good morning, and thank you for participating in today's call. Now I'll turn the call over to Chief Legal Officer, Mr. Bob Chamness. Sir, please proceed.

Thank you, and welcome to our Q3 conference call. Riley McCormack, our CEO; and Charles Beck, our CFO, are with me on the call. I'm also pleased to introduce Niall Murphy, the CEO and Co-Founder of EVRYTHNG, who will be available for questions during the course of the call. We are hosting this call from London, England at the corporate headquarters of EVRYTHNG. On the call today, we will provide an overview of the EVRYTHNG acquisition, and our path forward as a combined company. We will also discuss Q3 financial results and provide a business update. This will be followed by a question-and-answer forum. We have posted our prepared remarks in the Investor Relations section of our website and will archive this webcast there. Before we begin, let me remind everyone that today's discussions contain forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Charles will now comment on our Q3 financial results and discuss the financial aspects of the EVRYTHNG acquisition.

Thank you, Bob, and hello, everyone. Today is a monumental day for the company as we join forces with the amazing team at EVRYTHNG. Before I get into that, I want to provide a quick summary of Q3 financial results. Revenue for the third quarter was $6.4 million, up 12% from $5.8 million in Q3 last year. Service revenue increased 17% from $3.4 million to $3.9 million, reflecting higher commercial services related to HolyGrail 2.0 Projects. Subscription revenue increased 4% from $2.4 million to $2.5 million, reflecting higher revenue from commercial customers. Total commercial bookings were $3 million, up 60% from $1.8 million in Q3 last year. Operating expenses for the quarter were $12.2 million, flat with Q3 last year, reflecting higher consulting and recruiting costs, offset by severance costs incurred in Q3 last year for organizational changes we made in July 2020. In September, we received confirmation from our lender that our Paycheck Protection Program loan was forgiven. This resulted in a $5.1 million gain in other income in Q3 upon forgiveness of the loan. Net loss for Q3 was $2.9 million or $0.17 per common share versus a net loss of $8.4 million or $0.68 per common share in Q3 last year. Excluding the $5.1 million gain from the forgiveness of our PPP loan, the net loss for Q3 was $8 million or $0.48 per common share. We ended the quarter with $52.5 million in cash and investments. We used $8.6 million of cash and investments during the quarter, of which $7.5 million was from operating activities and capital expenditures. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we will file shortly. Now back to the EVRYTHNG transaction. I want to first highlight a few important deal terms summarized in the 8-K we filed this morning to provide more context. First off, this is a stock deal, with the consideration split into 2 tranches. The initial consideration will be issued at closing, which we expect to occur in January 2022, and the second tranche of consideration, if any, will be issued in September 2022. The initial consideration in January amounts to $50 million of common stock and warrants as adjusted for EVRYTHNG’s cash, debt, working capital and transaction expenses at closing. We estimate that we will need to fund approximately $7.9 million at closing in order to cover EVRYTHNG’s closing costs and other repayment obligations. We expect this cash expense to be offset largely, if not completely, by proceeds from the exercise of the warrants that we will issue to the sellers at closing. The number of shares to be issued at closing is based on a fixed value of $47.48 per share, which represents the volume-weighted average price for the last 20 trading days. We have estimated the number of shares to be issued at closing at approximately 785,000 common shares and 215,000 warrants. The exercise price of the warrants will be calculated as described in the 8-K. We expect that the exercise price will represent a substantial discount to our current share price. The warrants will be issued to provide EVRYTHNG shareholders the opportunity to cover their cash closing costs and thus receive the full number of shares they would have received without those closing costs. The exercise price was set low to provide them extra cushion to do so. To offset this lower exercise price, the amount of shares we are withholding is higher. While I encourage you all to read more details in the 8-K, the net of this is, if EVRYTHNG shareholders exercise their warrants, they get the number of shares they would have received at the $47.48 price prior to adjustment. If they do not exercise their warrants, then the total shares issued at closing will have been reduced by 30% of the cash closing cost amount that Digimarc funds. The additional closing consideration payable in September will range anywhere from $0 to $50 million of common stock. There are 2 features that could reduce the closing consideration from the maximum of $50 million. First, there's a traditional earn-out based on a product annual recurring revenue target. If EVRYTHNG meets or exceeds $10 million of product ARR as of the end of February 2022, then there is no reduction. If EVRYTHNG does not meet the $10 million product ARR target, then the closing consideration payable in September is reduced by 10 times the amount of the dollar shortfall in product ARR. Second, there's a reduction of the closing consideration if Digimarc stock appreciates above the $47.48 price used in determining the initial consideration. As measured during the 20 trading day period prior, ending on September 22, 2022. For example, if Digimarc’s stock were to double as of September 2022, there would be no additional closing consideration irrespective of EVRYTHNG’s product ARR results. While we are super excited about the future combined company, as you will hear Riley talk about in a bit, we are hesitant to part with a single share of Digimarc stock even at almost $50 per share. And so we structured the deal with that in mind. The structure of the transaction is intended to provide us with 2 levels of downside protection with 1 upside kicker. If EVRYTHNG does not meet the product ARR target, the closing consideration is reduced by 10 times the dollar shortfall. In addition, if Digimarc stock is below the $47.48 price as measured during the 20 trading day period prior ending on September 22, 2022, any consideration owed in the second tranche is calculated using the $47.48 lower. Meanwhile, we get full credit for any stock appreciation between now and the second tranche, which, in essence, allows us to benefit from a signed deal today but significantly limit the dilution if our stock is appreciably higher by September of next year. The structure is intended to result in a valuation of EVRYTHNG of between 5 times and 10 times product ARR with the ultimate valuation depending on the February 2022 product ARR and our stock price. For high-growth, high-margin SaaS business, even before considering all of the strategic and synergistic value we expect this transaction to provide us, this is a really attractive valuation. This headline valuation multiple is a testament to the vision of the EVRYTHNG shareholders as they see something, which you will hear us say many times in the future. We are just simply better together. More on that in Riley's remarks, but I want to first provide some more financial context. The financial figures I'm about to discuss have been prepared by EVRYTHNG’s management and have not been audited. Note that EVRYTHNG prepares its financial statements in accordance with FRS 102, also known as U.K. GAAP. These financial figures have not been reconciled to U.S. GAAP. EVRYTHNG uses the financial metrics annual contract value, or ACV, and product ARR as leading indicators of future top line growth. While ACV is very similar to the financial metric we used for the same purpose, bookings, they're not the exact thing. For the first half of 2021, EVRYTHNG’s AVC - ACV was $3.2 million compared to ACV of $2.5 million during the first half of 2020, growth of 29% year-over-year. For the first half of 2021, total revenue was $2.5 million, of which product subscription revenue was $2.2 million and the rest was service revenue. Product subscription revenue for the same period in 2020 was $1.8 million or a growth of 21% year-over-year. As of September 30, 2021, product ARR was $4.9 million. We believe product ARR is the best indicator of the next 12 months of subscription revenue, but it may be conservative as it does not reflect revenue growth from new customers or expansion with existing customers. It is simply an annualized snapshot of the current product subscription revenue line item. Thus, annualizing the first half of 2021's $2.2 million in product subscription revenue, comparing that to the most recently finalized product ARR number of $4.9 million and then looking out to EVRYTHNG’s projected February 2022 product ARR at a target of $10 million should give you a sense of the current growth rate and near-term prospects of this incredible business. Subscription gross margins are in the low 70% before any revenue share payments from deals brought in by EVRYTHNG’s robust partner network. While this is all preliminary, we believe we can optimize their cost of sales and get subscription gross margins into the high 70s at existing revenue levels with expected revenue growth, subscription gross margins should expand. EVRYTHNG is currently using around $2 million a quarter to fund its business. They're able to increase their product ARR, the cash usage should decline significantly given the just mentioned high subscription gross margins. Riley will now provide a business update and further details on the strategy behind the EVRYTHNG acquisition.

Thanks, Charles. I want to use the bulk of my prepared remarks to discuss the EVRYTHNG acquisition and the results of our first annual product strategy meeting because both events have set our company on a different trajectory. And while we realize that it might only be through the passage of time in the marking of business travel that the true delta will be fully appreciated. I cannot stress enough how wonderfully impactful we believe these events will prove to be. As we say internally, we are not going through a transition but rather a transformation. For those of you who have followed Digimarc’s story for a while, EVRYTHNG is a company you likely know well. They have been a valuable go-to-market partner for 5 years, and we share multiple customers who have realized the benefits of what we are today permanently achieving. Our 2 companies just make so much sense together. For those of you not as familiar with EVRYTHNG, they pioneered and are the market leader in the category of the product Cloud. At its core, the product Cloud provides a cloud-based digital twin for any physical item. From birth to rebirth, this digital twin or active digital identity records an analog item's journey, allowing a tremendous amount of knowledge and insights to be gained. Data heretofore uncaptured is now easily accessible, analyzable, and actionable, powering true digital transformation. This digital identity allows an analog item to be born digitally, enjoying all the informational and business transformation advantages that digital items have enjoyed for years. Today, some of the world's most respected companies are using the EVRYTHNG product cloud to gather and apply data from and about their products as these items move through the supply chain, powering solutions such as traceability, product authentication, and consumer engagement. As adoption of the product cloud increases, not only will the features within these three applications grow more robust, but the number of applications will also grow, similar to how the utility of the internet has expanded as more people connect and more minds focus on unlocking value from the cloud. Digimarc, as you all know, provides a unique means to give both analog and digital items a deterministic identity. We separate ourselves from other means of identification through three attributes: a) we are covert; b) because we are covert, we can be ubiquitous; and c) because we can be ubiquitous, we are redundant. For solutions that require 1, 2, or 3 of these characteristics, we will either be the best or, in many cases, the only solution. The synergies and logic behind this combination are clear. Today, we are merging a unique and advanced means of identification with the pioneer and most advanced supplier of traceability business intelligence to any form of auto identification. While we will always have customers that will want one or the other—either solutions based on our unique method of identifying an item or our product cloud with a non-watermark product identifier—for those that want both, which we believe will comprise a large portion of our target market, we are eliminating the hassle of having to stitch together their own solution. We will handle that integration work ourselves, making our customers' business problems easier to solve and thus increasing our value to them. Importantly, this isn't just a thesis. As I mentioned before, we already have shared customers that have beat us to the punch. For those visionaries, we look forward to optimizing our combined solutions, making what they bought separately so much better now that we are one. For our future customers, we look forward to alleviating the hassle of integrating these solutions themselves. And to both groups, just wait until you see where we're taking our combined roadmap. Now that a single company is taking ownership of so many more of your business problems, our ability to enhance your business has expanded dramatically. More specifically, the rationale for this deal is as follows. First and foremost are the people. EVRYTHNG pioneered the private cloud market. They turned an idea into a product and convincingly evangelized the need for this product, succeeding in converting some of the world's most respected companies. They are collaborative, curious, and courageous, and we are excited to form one team with our new colleagues. So much so, in fact, that all the other benefits I'm about to list are pure upside. If all we were gaining in this deal were these incredible like-minded teammates, that alone would have justified the acquisition. The second rationale for the deal is the product. EVRYTHNG isn't just a pioneer; they are the market leader in the product Cloud. We are still in the very early stages of the world’s inevitable march to true digital transformation, and there is a pressing need for a powerful product graph to enable this movement. If the last 2 decades saw the development of the human graph as one of the dominant tech trends, we believe the building of the product graph will be one of the defining trends of the next 2 decades, and it will be factors larger than its human counterpart. Just as CRM and ERP data clouds have become core business platforms, so too will the product data cloud, as the data from the products themselves plays a significant role in providing transparency, business integrity, operational efficiency, and sustainability impact measurement and responses. The size and utility of the product cloud are still in their infancy, and today we are combining with the market leader. The opportunity that lies ahead of us is enormous. The third rationale relates to the value our combination will bring to our customers, partners, and prospects. The best determinant of a technology product's true value is how much of the customer's problem it can solve, as full ownership of the business problem is what enables a product to evolve into a solution. By pairing an analyzed item with a unique means of deterministic identification, linking that identification to its digital twin, applying an ever-increasing amount of business logic—both programmed and predictive—to that digital twin, and providing easy access to that business logic, we will not only offer a complete solution to our customers' problems, but also unlock the potential to solve additional challenges because the item resides at the nexus of our dual platforms. We will not only be able to address the issues that led customers to us but also provide seamless solutions to problems they didn’t initially consider when they began their journey with us. The fourth rationale hinges on the edges of the above-described solution. As I mentioned earlier, EVRYTHNG has plenty of customers who today, another form of identification works perfectly well as a bridge to a digital twin. Simultaneously, we have numerous customers who do not currently need a product cloud to benefit from our unique form of deterministic identification and the solutions driven by those methods. While we will happily support customers and partners who don’t see the need for our combined solution, the close relationships built across our newly merged company facilitate future cross-selling, whether it be today or in the future. Fifth, one of the many ways our two companies complement one another is in geographic presence. EVRYTHNG has a robust presence in Europe while achieving success in North America. Conversely, Digimarc is a North American company that sees plenty of opportunities in Europe. This merger instantaneously enhances both companies' international presence, supported by top-tier talent well-versed in our shared corporate culture. There are additional benefits from this combination along various dimensions, both strategic and tactical, but I want to add one last thought before we open this up for Q&A. Of all the impressive and synergistic logic of this deal, the one factor that does not play a role is headcount reductions. Both companies are aggressively hiring in preparation for the massive opportunities ahead of us. As a result of this deal, those prospects will only increase in size and number. And now that we and our customers can envision where we will take our combined solution, there will be even more urgency on both sides to reach those goals. So I want to be very clear: there is room on this bus for both teams. In fact, during and even post full integration, we will still be in hiring mode. I want to end this part of my prepared remarks by reiterating the first and most important rationale for this deal, speaking directly to all of my teammates, both old and new. Today, we are beginning our one-team story. While everything about this combination excites me, it is the merging of these two teams into one team that brings me the most anticipation. Outside of our newly expanded four walls, I don’t expect this to be as fully appreciated as it is by us because it is difficult for anyone not inside to fully grasp where we are headed and what we will accomplish. Let's go show them. Turning now to the results of our first annual product strategy, I'm thrilled to share with you the output, which cements our pivotal shift to a product-led company. This is the first checkpoint in the journey we discussed during the Q1 call in late April. When we talked about the importance of controlling our own future instead of allowing anyone with a logo and a small check to consume our valuable engineering resources building bespoke solutions not supported by proactive market research. Most technology companies start by identifying a problem and then working backwards to provide a solution. That is significantly easier than the alternative, which is what we did; starting with technology that has almost unlimited applicability and immense competitive advantages, we decided what problem to tackle first. The former is simpler, but I'd rather have the latter because it means our ultimate opportunity set is virtually limitless, whereas a limited focus translates to a limited potential payoff. Thus, starting where we did is immensely preferable, with one important caveat: discipline is required. The market will try to pull you in a multitude of directions, so discipline mandates that we spend the necessary time thoroughly researching every potential issue we could address, in order to understand market size and growth, our competitiveness, differentiation, market readiness, controlled dependencies, and how best to fill any gaps that exist in our offerings. Discipline takes this research and applies a filter to prioritize among possible opportunities while having the courage to say no—whether that means a flat denial or simply 'not yet.' In other words, discipline is about taking the time to plan and having the insight necessary to prioritize effectively. This is the principle behind our ABS initiative, the realization that we must move purposefully to build our own solutions and thus create our own future. Now let's get specific. The criteria we will use to measure all potential solution candidates are as follows: first, does the solution target a large and rapidly growing market? Second, will our solution be high-margin and scalable? Third, does our technology deliver a differentiated advantage? This last criterion is crucial, a reiteration of the previous seven. Simply addressing a substantial and fast-growing market isn’t sufficient. Our technology must present an exceptionally wide competitive moat because that is where high margins and shorter sales cycles will be derived. We’ve also added a nice-to-have standard: does the solution candidate enhance our network effects and contribute to our pursuit of ubiquity? With that as our guiding framework, coupled with the tremendous effort from both our product and engineering teams, we have settled on our first sets of solutions: one, product authentication anti-counterfeit or pack; two, online brand protection or OBP; three, recycling; and four, product cloud. To be clear, this is where we are starting, not stopping. For example, in addition to these, we have one solution we hope to be able to talk about in the not-too-distant future but are not yet prepared to disclose publicly. Furthermore, we will maintain a pipeline of solution candidates. It is very likely that one of our strongest sources of ideas will always be the market itself. Thus, as important as deciding what businesses we are in today, we have also formalized a process for managing inbound interest. This can be a valuable source of idea generation if adequately handled. Scoped correctly, inbound interest generates three clear benefits: first, it generates revenue from customers or partners who are willing to work with our existing tools rather than waiting for our finished solutions—understanding that they will have to proceed without support from our engineering team, who will be focused on building our future. Second, it allows the product team to learn about areas of potential interest in the market, acting as a source of profitable market research. And third, it provides connections with paying partners that could help them accomplish their own research goals. Make no mistake, there are numerous checkpoints in place to shut down any inbound interest that does not align with our core focus area. As we emphasized in our April call, our engineers and their road maps aren't up for grabs. Listening to prospects instead of ignoring the voice of the customer gives us a profound competitive edge, which the universal applicability of our technology will always provide. In fact, the above-mentioned solutions—all came about through customer engagement, or in the case of the product cloud, through customer actions. This positive trend of letting prospects guide our market research will likely continue for years because the number of individuals thinking about how our technology can improve their businesses and industries is probably just a fraction, leaving billions of others yet to engage with us regarding the difficulties they want us to resolve using a generationally transformative technology. As we glance out towards the future, I am uncertain what our final solution count will be, but one fact is clear: our product, go-to-market, and technology strategies must align to allow customers to progress seamlessly with us, regardless of where they begin their journey. One of our key differentiators and value propositions is the fact that there will always be additional steps available for our customers to take beyond their initial engagement. Exiting our first-ever APS, we are acutely aware of what we must and will do: we will make it easy for customers to start realizing value with us, cultivate long-standing relationships that provide exponential has constant value by continually adding new solutions, and guide our customers on the best path to achieve that latent exponential growth. Connecting these two monumental events, a few takeaways deserve attention. EVRYTHNG’s emphasis on product authentication will strengthen our existing pack offering and vice versa. We can now enhance our distinctive advantages with the programmatic and predictive intelligence that EVRYTHNG has integrated into its authentication module. Instantly, we have two differentiated offerings that have significantly distanced themselves from the competition. Over time, we will open up even more opportunities as we align our respective roadmaps. This same synergy applies to our recycling initiatives. Consumer education and engagement are integral to improving recycling rates; EVRYTHNG, through its engagement module, is a thought leader in auto-optimizing business rules to enhance engagement for both brands and consumers. Additionally, to meet the diverse needs of all stakeholders—brands and retailers, sorters and recyclers, PROs, and regulators—it's evident that a deterministic sortation system must be dynamically updated through the cloud. The only way to create a system capable of adapting to future unknown requirements while also being robust enough to manage current supply chain irregularities is this approach. It will provide real-time improvements in both effectiveness and efficiency across the entire system. Like all our solutions, the recycling initiative will not only benefit from the synergies unlocked by a joint roadmap, but crucially for customers seeking our combined solution, we will eliminate the integration burden as we handle that ourselves. Until now, the minds behind the largest and most reliable product cloud have been removed from the cross-value chain collaboration that is HolyGrail 2.0. We believe that whatever shape or structure the recycling cloud takes, having EVRYTHNG’s insights, expertise, and trusted relationships involved will benefit not only HolyGrail 2.0 but the industry at large—and ultimately the planet. The two groundbreaking initiatives we are announcing today—merging with a steadfast go-to-market partner and Digimarc's transition to a product-led organization—are not only each significant in their own right but also complementary to one another. I’m confident you all will have numerous questions, and we look forward to engaging in Q&A shortly. However, before we do, I want to spend a few minutes discussing recycling. As anyone monitoring social media knows, HolyGrail 2.0 is attracting increasing visibility. Yet, our objectives extend beyond merely successful trials towards fostering widespread adoption; only through mass adoption across the value chain can we achieve circularity and meet recycling rate targets. That's why we are urging all stakeholders to recognize that now is the pivotal time to adjust their mindset. Due to the efforts of brilliant and committed individuals both within and outside our organization, it is becoming exceedingly clear that our technology works and, if adopted, can help combat the plastics crisis. As we continue to support this initiative fully, we appreciate its impact in raising awareness across the value chain. From both an industry and regulatory perspective, we believe the timing is perfect to shift focus on how the value chain can move towards adoption. We are still actively exploring other avenues for promoting the benefits associated with digital watermark adoption—especially outside of Europe. We believe that once the first contract is executed, the need for additional projects will diminish significantly. Until we arrive there, we are selectively pursuing alternative opportunities that can provide additional tangible proof points. We will sprint towards realizing global adoption. The stakes for our planet are far too high for any delay. We all understand that the world is watching to ensure that words and tests translate into concrete actions. Finding a solution for the end-of-life problem with plastics is a global necessity, and we firmly believe that digital watermarking offers a valuable solution to this issue. It has been gratifying to witness more and more participants reach that conclusion. We are expressing a sense of prudent urgency because every day of delay between now and eventual adoption results in tangible environmental harm without yielding any true value-added proof. This, ladies and gentlemen, is where our minds are focused and the message we are delivering.

We are now ready for the Q&A session. Your first question comes from the line of Harvey Mordka, who is a private investor.

Can you discuss the patents that are coming with EVRYTHNG?

Niall, do you want to take that?

EVRYTHNG has a small portfolio of patents pertaining to the redirection of digital content from physical identities on products and various aspects of digital authentication, utilizing data science methods. These patents, we believe, are very complementary to the identification methodologies that Digimarc already has, and represent a substantial portfolio.

Also, are we reaching any new contracts with Walmart or Procter & Gamble, Wegmans? I haven't seen anything that indicates some new additional cash flow.

You are considering 60% growth in bookings this quarter.

I guess I'm not saying it.

I realize that, there's not a whole lot we can share with names and logos. I think that goes for almost every company in the world, so.

Your next question comes from the line of Robin Knipp with Janney Montgomery.

I’ve been on a number of webinars lately, all involving digital watermarks. I must confess, I cannot remember which one it was that I've heard this, but Riley, can you talk a little bit about how digital watermarking can be incorporated with artificial intelligence? And where this most recent acquisition may take us in that capacity?

So depending—so artificial intelligence is a big area. What artificial intelligence is trying to do is take inputs and come up with an answer. We have a deterministic input. So we can improve any artificial intelligence system by providing, as opposed to looking for 3 or 5 or 7 probabilistic inputs, we deliver deterministic data. We enable artificial intelligence to work more effectively when we're present. There's also an application of our technology since one of the challenges in building an artificial intelligence system is training that system. A lot of the time, that's done through human means—actually looking at 10,000 photos of an item and trying to determine what it is. We can provide that easy mechanism for training artificial intelligence. And I'm going to turn it over to Niall to talk a little about machine learning and the predictive business intelligence that EVRYTHNG brings us.

Thanks, Riley. The product cloud is capable of collecting data points from physical items using the deterministic identities of those items as they move through a value chain, for example, and then applying real-time analytical technologies, including machine learning methodologies, with those data points to derive actionable insights. The combination of trustworthy input data points from tracking items with predictive or analytical analysis of those elements in real time offers powerful application benefits. Currently, EVRYTHNG is in a pre-production mode for a variety of prediction methods, specifically applying traceability data points in the supply chain where one gains partial data samples from a subset of products, for example, to build predictions of potential integrity threats for parallel trade within a supply chain. These techniques are currently in test mode, not yet in production.

Yes. But if you think about that, obviously, there's a lot that programmatic learning can do in supply chains. But when you're dealing, for example, with bad actors, product authentication predictive capabilities can keep us ahead of what they might be devising, which is significant. And that's just—I mean, if I were to list every single complementary overlap between these two companies, it would be a five-hour conference call, Robin, but this is just another area of alignment where we have found a great fit.

Your next question comes from the line of Jeff Bernstein with Cowen.

Can you just talk, Riley, about both the PAC and FOBP offerings? And give a little color around why those are ones that you're particularly interested in, the customer interest level, or the problems to be solved that are at the forefront, etc.? Any insight you can provide.

Sure. All of our solutions were born from customer ideas, and we then conducted the necessary research. We’ll have much more clarity on this as we begin to market the solution. So, Jeff, I'm asking for your patience as we roll out our product market research. However, both of these areas emerged from customers approaching us and expressing, 'I think if I understand your technology, this could be a game-changer for us.' We have multiple customers already engaged in these areas, and they haven't waited. What's remarkable is we haven’t even officially launched Version 1.0 PAC. We're still in beta, yet we're already seeing significant interest.

This is Aaron on for Jeff. Just a few questions here for us. So first, regarding the EVRYTHNG deal, could you give a sense of the visibility for growth rate acceleration? I think you mentioned something like a 20% to 25% range over the first half of the year, obviously assuming that goes up materially. So, what's your confidence in reaching that rate?

From our side or from EVRYTHNG side? I will tell you that we have conducted customer diligence calls. We have reviewed their pipeline. What the ultimate close rate will be remains to be seen. But this is a high-growth business that is on the rise. What that final rate will be, we’re not certain. However, we have comfort in getting there based on our customer calls.

Yes. And I would echo Riley's comments. The market for digitizing physical items, coupled with the global consumer brand appetite, is only growing, and we see a healthy level of demand in our pipeline. The uncertainties primarily focus on our rate of conversion.

Yes. This is definitely risky business. Acquisitions always carry that uncertainty. However, as I've mentioned, we have been partners with EVRYTHNG for 5 years now, and our shared customers have provided us valuable insights into our trajectory. Those conversations reveal the increasing need for the services that we can offer together.

Your next question comes from the line of Jeff Van Rhee with Craig Hallum Capital.

On the bookings number, obviously, there was a material acceleration sequentially and year-over-year. Could you provide any additional insight into the use cases that are driving the strength of those booking numbers?

So certainly. The primary driver of this momentum is our ongoing work with HolyGrail, which continues to gain traction. Additionally, we're observing heightened interest in our PAC area, related to product authentication. Those two factors are the primary contributors to our growth. Just to reiterate, we haven't even officially launched Version 1.0 PAC yet, but we're already seeing significant interest and growth.

Your next question comes from the line of Jeff Van Rhee with Craig Hallum Capital.

Any updates on thermal deployment and the potential for package marketing or speed checkout?

I assume you are referring to Walmart?

Yes, just regarding that product offering.

Yes. So you might recall that thermal wasn’t one of the products we emphasized moving forward. As originally stated in the contract with Walmart, thermal was already included, and they have what they need if they choose to implement it. For our existing customers, we will continue to provide support for everything we have sold them. Nevertheless, our focus now is on our go-to-market strategy going forward, where we’ve shifted our emphasis beyond thermal.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Riley McCormack. Sir, please proceed.

Well, thank you, everybody. I know this is a different day and time slot than we typically have for these calls, but we had a couple of things we needed to finalize before proceeding with our call. We appreciate your patience during this time. Hopefully, you share in the enthusiasm we've conveyed today. I truly believe these—both the APS and our merger with EVRYTHNG are transformative, and we're eager to showcase the real impact of these changes. Thank you, everyone. Have a great rest of your day.

This concludes today's call. Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.